For many decades, the Royal Mail had a legal monopoly in the U.K. Companies in the postal business have increasing returns to scale, then constant returns to scale, and then decreasing returns to scale. The Royal Mail’s minimum average cost is £2 at 100 million deliveries and its minimum marginal cost is £1 at 75 million deliveries. The demand for postage is zero at a price of £10, and demand is 300 million deliveries at a price of £0. Marginal revenue is zero at a price of £10 and 150 at a price of £0. Note: Unless otherwise stated, the numerical answers in this question do not need to be exact but should correspond to how you have drawn your graph. (a) Draw a large graph showing the Royal Mail’s average cost curve and its marginal cost curve. Show how many deliveries would be made, and at what price, if Royal Mail operated as a monopoly. Show the Royal Mail’s profit or loss on the graph.
For many decades, the Royal Mail had a legal
postal business have increasing returns to scale, then constant returns to scale, and
then decreasing returns to scale. The Royal Mail’s minimum average cost is £2 at 100
million deliveries and its minimum marginal cost is £1 at 75 million deliveries.
The
deliveries at a price of £0. Marginal revenue is zero at a price of £10 and 150 at a
price of £0.
Note: Unless otherwise stated, the numerical answers in this question do not need to
be exact but should correspond to how you have drawn your graph.
(a) Draw a large graph showing the Royal Mail’s average cost curve and its
marginal cost curve. Show how many deliveries would be made, and at what
price, if Royal Mail operated as a monopoly. Show the Royal Mail’s profit or
loss on the graph.
(b) The government makes a law restricting the price of postage to £1. Show the
effect of this policy in the short-run in a new, large graph. The graph should
show the firm’s average cost, marginal cost, marginal revenue, and consumer
demand. How much postage is bought? Show on your graph if the Royal Mail
is in profit or loss, and by how much.
(c) New technology changes delivery firms’ technology. Now, the minimum
average cost is £2 at 1 million deliveries and a minimum marginal cost of £1
at 0.75 million deliveries. The government removes all price restrictions and
allows free entry. Describe the long-term outcome for this market, using two
graphs, one at the firm-level and one at the market-level. How many firms will
be operating in the long-run? Note: a precise answer is possible for this
question.
Step by step
Solved in 3 steps with 1 images
